Accounting Equation and Impact of various adjustement on Accounting equation

You can also visit our website, www.iedubook.com to watch many more videos on Accountancy prepared by CA. Arinjay Kumar Jain. Have a happy learning.

Accounting equation forms the basis or the foundation for the double entry bokk-keeping system. According to this equation, for each and  transaction, the total debits equal the total credits.

It is also represented as under : -

Assets = Liabilities + Capital

Impact on Accounting Equation - Introduction of Capital  in business

When capital is introduced in Business, Cash available with the business increases. An increase in asset is debited and added to the asset side. Similarly, the business owes the same amount to owners for capital and this amount is credited, and hence shown on other side of Accounting equation.

Impact on Accounting Equation for Salary payments

Payment of Salary in cash reduces the Asset side of the Accounting Equation. Similarly, given that Salary is an expenditure, on a standalone basis without any income it would increase the loss of the Business and reduce the Capital of owners.

Impact on Accounting Equation - Purchased Plant and Machinery  in Cash Credit

Purchase of Plant and Machinery  in Cash or Credit would increase the Asset available in Business, namely Plant and Machinery and hence be Increased in the asset side by that Amount. When its purchased in cash, it would reduce cash balance on Asset side. On the other hand, when purchased on credit, it would increase the liability to the Supplier of Plant and Machinery

Impact on Accounting Equation -  Capital withdrawn by owners

When the owners of business withdraw capital, Cash is reduced from the Asset side to that extent since its paid to the owners. At the same time, since amount due to owners from Business is reduced, capital account of the owners is also reduced by an equal amount